Civil tax investigations versus criminal tax investigations

HMRC’s policy is to deal with most tax fraud and evasion cases through civil investigation.

It does this by making use of the Contractual Disclosure Facility (CDF) procedures, but retains the right to begin criminal proceedings in any case that it sees fit.

There are key differences between civil and criminal investigations.

Civil investigations are more numerous, and most are easily resolved.

On occasion, however, criminal investigations can arise out of civil investigations. 

This can happen because of how the party being investigated chose to respond to a civil matter.

Bearing in mind the potentially serious consequences of a criminal investigation, it’s important to do all you can to avoid an escalation in your case.

Criminal investigations

HMRC criminal investigations happen in far fewer cases than civil investigations.

They are usually opened when it’s felt the potential fraud is much more serious, and HMRC wishes to send a strong deterrent message.

The case is deemed so grave that a criminal sanction is appropriate, or where the evidence that HMRC has gathered is overwhelming. Typically, the kind of cases investigated by HMRC’s investigation team includes:

• Money laundering
• Commercial tax fraud
• Hidden overseas assets
• Submitting false or forged documents
• Where HMRC has offered a Contractual Disclosure Facility (CDF) and this has been rejected.

Usually, criminal investigations are launched when information is received from a third party.

This may be an offshore bank or another financial institution.

By their nature, these investigations are initially kept secret to avoid the party being investigated taking evasive measures.

Often, the first thing an individual will know about the investigation is when they receive a letter inviting them to an interview under caution at a nearby police station.

In some cases, it may be even be through a raid of their home or commercial premises.

By the time an investigation has reached this stage, proceedings are well-advanced, and if the target hasn’t yet sought legal support, they should certainly do so.

An HMRC criminal investigation can make full use of the Police & Criminal Evidence Act (PACE) powers. 

These include surveillance, dawn raids with HMRC officers entering via force if necessary, questioning under caution, and arrest.

Criminal tax investigations are quite rare, but the consequences can be serious, as you would expect.

As well as a financial penalty, HMRC will try and secure a criminal conviction, and in some cases, a prison sentence.

A criminal tax investigation will rapidly become public knowledge, and even if the party being investigated is acquitted, it can have a detrimental impact on their reputation.

Civil investigations

The overwhelming majority of HMRC enquiries are conducted according to civil law, and financial penalties may be applied rather than resulting in imprisonment.

The grounds for launching a civil investigation are less serious than for a criminal one, but very serious nevertheless. Typically, this might include repeated errors on your tax submission, large discrepancies in income year-on-year, or an income that seems out-of-kilter with the industry norm.

Every year, HMRC also conducts a number of purely random investigations.

Most will be resolved through the sharing of information and the clarifying of certain issues. Should they proceed further, they will usually take place under Code Of Practice 9 (COP 9), where the person being investigated is then given the opportunity to make an accurate and complete disclosure of all their deliberate and non-deliberate conduct that has resulted in errors in their tax affairs.

This disclosure is made through an agreement between the individual and HMRC known as a Contractual Disclosure Facility (CDF).

This can be problematic for parties being investigated.

Previously, it was possible to reject the CDF, but agree to engage fully with the HMRC investigation.

That option has since been removed, with civil investigations now being conducted with a more aggressive approach that requires an individual to accept the CDF or risk the possibility of a criminal investigation.

Often, individuals are genuinely unaware of the details of any errors they have made, but they need to accept culpability to prevent their case becoming a criminal investigation.

The terms and conditions of a CDF are fixed and completely non-negotiable, but they do guarantee you won’t be subject to a criminal investigation.

By agreeing to the CDF, you are in effect admitting responsibility for mistakes or deliberately misleading information in your tax affairs.

HMRC will then attempt to recover unpaid tax, and any associated penalties.

Its officials can go back through two decades of your financial affairs to work out your total liability.

In some cases, HMRC may well proceed under Code of Practice 8 (COP 8).

This usually means it suspects your case is more complex and serious, and is likely to involve abusive Tax planning.

Unlike with COP 9, it offers no guarantees that it won’t proceed to a criminal investigation.

In fact, it can often be a precursor to a criminal investigation, and should you receive notification that you are subject to one, you should immediately seek legal advice.

Seek professional advice

Civil investigations may not have as serious consequences as criminal investigations, but they can be disruptive and stressful.

The average length of an investigation is 6 months, and HMRC is clear about what it requires from the people it investigates.

Failure to respond accordingly can have serious consequences.

If you are subject to a civil investigation, you should seek expert legal advice.

At Jeremy Gordon, we’re experienced at guiding people through the investigation process.

You can discuss your case with one of our lawyers on a no-obligation basis.

Contact us to find out how our professional, experienced and discreet advice can help you navigate a HMRC civil investigation.